The Time to Act is Now - Liquidity and Debt Solutions to Invest in the SDGs: MARCH 2021 - United Nations Sustainable ...
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Liquidity and Debt Solutions
to Invest in the SDGs:
The Time to Act is Now
MARCH 2021CONTENTS
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
One year into the crisis: a stocktaking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SDG INVESTMENTS FOR RESPONSE AND RECOVERY. . . . . . . . . . . . . . . . . . . . . 6
Provision of fresh financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
LIQUIDITY SUPPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A new general allocation of SDRs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
EXTENSION OF THE DEBT SERVICE SUSPENSION. . . . . . . . . . . . . . . . . . . . . . . 10
DEBT RELIEF AND THE COMMON FRAMEWORK. . . . . . . . . . . . . . . . . . . . . . . . . 11
THE INTERNATIONAL DEBT ARCHITECTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Strengthened architecture through principles. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Building on existing initiatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CONCLUSIONS AND CALL FOR ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021Introduction 1
COVID-19 has caused an extraordinary and iii) addressing structural deficiencies of
socio-economic crisis throughout the world. the international sovereign debt architecture
More than a year into the pandemic, the world is to prevent defaults from leading to prolonged
still in firefighting mode. Long-term economic financial and economic crises in the future.
scarring effects and an uneven recovery,
potentially leading to a sharply diverging world, The international community’s response was
are also increasingly coming into focus. The significant, but not sufficient. Initial measures
severe fiscal impacts of the crisis are triggering included monetary easing, access to fresh
debt distress in a growing number of countries, concessional financing, a suspension of
severely limiting the ability of many countries debt service payments on bilateral debts,
to invest in recovery, climate action, and the and targeted but limited relief on some
sustainable development goals (SDGs). multilateral debt. More action is needed.
Such fiscal impacts, along with the rise of The purpose of this policy brief is to take
vaccine nationalism, have also resulted in stock of the global policy response since
developing countries facing enormous difficul- April 2020, assess remaining gaps and chal-
ties in accessing vaccines against COVID19, lenges for their implementation, and propose
which threatens to prolong the recovery updates to the original recommendations in
period. Unless we take decisive action on light of developments over the last year.
debt and liquidity challenges, we risk another
‘lost decade’ for many developing countries,
putting the achievement of the SDGs by the
ONE YEAR INTO THE
2030 deadline definitively out of reach.
CRISIS: A STOCKTAKING
In my April 2020 policy brief on debt, I proposed
a three-pronged approach to address impending Over the last 12 months, countries have taken
debt and liquidity issues caused by the pandemic unprecedented policy actions to control the
in developing countries: i) a debt standstill
2 spread of the deadly virus and mitigate its
to provide immediate breathing space for all socioeconomic impact. To reduce pressure on
countries that need it; ii) additional, targeted overwhelmed health systems, governments
debt relief for countries that require support imposed exceptional social distancing poli-
beyond a temporary suspension of debt service; cies, including lockdowns, business closures
and travel bans. These emergency policies
1 This Policy Brief draws on the Financing for Sustainable Development Report 2021 of the Interagency Task Force on Financing for
Development, as well as Kharas, H. and Dooley, M. (2021). Debt Distress and Development Distress: Twin crises of 2021. Working Paper
153. Washington, D.C.: Brookings, 35 pp.
2 United Nations, ‘Debt and COVID-19: A Global Response in Solidarity,’ Executive Office of the Secretary-General (EOSG) Policy Briefs and
Papers No. 4, https://doi.org/10.18356/5bd43e89-en.
3 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021succeeded in flattening the curve of contagion markets since April 2020, only two countries
and saved lives, but they also resulted in a in Sub-Saharan Africa have been able to issue
4.3 per cent contraction of world GDP, the 3
new bonds. Going forward there is a risk that
first increase in extreme poverty since 1998, many middle-income SIDS and LDCs with very
and the loss of the equivalent of 114 million high refinancing needs in 2021 will not have
full-time jobs relative to the level in 2019. 4
access to financial markets at affordable rates.
These impacts could have been significantly The rapid growth of financing needs and the
worse in the absence of extraordinary national collapse in revenues and GDP growth caused
fiscal support measures, which amounted to by the pandemic have exacerbated debt burden
a global total of $18 trillion as of March 2021. risks across the globe. Over half of least devel-
However, the capacity to respond to the crisis oped and low-income countries that use the
differed markedly across country groups. In IMF-World Bank Debt Sustainability Framework
2020, advanced economies increased their fiscal (LIC-DSF) are now assessed as being at a high
expenses by more than 13 per cent of their GDP, risk of debt distress or in debt distress. And,
compared to less than 4 per cent and less than according to a new IMF methodology for assess-
2 per cent for middle-income and low-income ing the risk of a fiscal crisis using machine
countries respectively. These differences reflect learning, more than a third of emerging market
the existence of constraints to fiscal spaces and economies are at high risk of fiscal crises.
difficulties of access to external financing.5
Among the 151 economies that borrow from
In fact, many least developed countries entered capital markets and, consequently, are rated
the crisis with already elevated debt risks. by the three major rating agencies, 42 have
Globally, debt risks had been on the rise since experienced downgrades since the start of the
the 2008-2009 global financial crisis, as the pandemic, including 6 developed countries, 27
world experienced the largest, fastest, and emerging market economies, and 9 least devel-
most broad-based episode of sovereign and oped countries. Sovereign downgrades cause
corporate debt build-up in the past 50 years. borrowing costs to rise, especially for developing
countries, which can, in turn, increase the risk of
In March 2020, at the outset of the pandemic, more countries tipping over into unsustainable
capital flows massively exited developing debt – especially if the COVID-19 pandemic is
countries, threatening to cause a major financial more protracted and deeper than expected.
crisis, but a massive expansion of central bank
liquidity in developed countries stabilized global As the world gradually recovers from the current
financial markets and facilitated a return of crisis, catch-up growth will remain vulnerable
capital flows to some developing economies. due to the risk of a premature phase out of
However, the recovery in portfolio flows has current fiscal support measures, continuing
been highly uneven. While some middle-income debt service obligations, and low levels of
countries have returned to international bond public and private investment, which need to
3 United Nations (2021). World Economic Situation and Prospects. New York, United Nations, p. viii.
4 ILO Monitor (2021). ILO Monitor: COVID-19 and the world of work. Seventh edition.Updated estimates and analysis. www.ilo.org/
wcmsp5/groups/public/---dgreports/---dcomm/documents/briefingnote/wcms_767028.pdf.
5 www.imf.org/en/Topics/imf-and-covid19/Fiscal-Policies-Database-in-Response-to-COVID-19.
4 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021be boosted substantially.6 It is our common in the Era of COVID-19 and Beyond to enable
responsibility to ensure that adjustments to discussions of concrete financing solutions
current policies do not happen too soon or in a to the COVID-19 health and development
disorderly manner. After the worst peacetime emergency, as well as options to recover
global contraction since the Great Depression, better and invest in a more sustainable and
we will only recover if we respond together. inclusive future. Many of the recommendations
below originated in the discussion groups
In May 2020, the Prime Minister of Canada, that came together under this initiative.7
the Prime Minister of Jamaica and I convened
the initiative on Financing for Development
6 World Bank (2021). Global Economic Prospects. Washington, D.C.: World Bank, p.115.
7 For further detail on the Initiative on Financing for Development in the Era of COVID-19 and Beyond, see www.un.org/en/coronavirus/
financing-development.
5 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021SDG investments for response
and recovery
The main priority at the moment is to ensure Productive investments aligned with sustainable
that developing countries will have enough development should help countries improve
fiscal space to recover from the pandemic, debt management in the long run, even while
vaccinate their populations, and invest in raising debt levels in the near term. Multilateral
the SDGs, including climate action. This development banks (MDBs) have an important
will require fresh financing, in some cases role to play in offering long-term and counter-
combined with debt relief measures. New cyclical financing to developing countries.
borrowing should not be considered a Some multilateral funds have front-loaded their
concern, provided that it finances productive commitments in response to the crisis. However,
investments that enhance the resilience of without further action from donors, the funds
the economy in the long run. Debt relief can could dry up at a time when client countries still
free up resources and create conditions require considerable support. As an example,
under which countries can return to voluntary IDA increased its spending in response to the
market access and lower borrowing costs. pandemic to the extent that it is now seeking a
new replenishment one year ahead of schedule,
with negotiations starting as early as April 2021.
PROVISION OF FRESH Going forward, the MDB system should signif-
FINANCING icantly scale up financing, consider extending
maturities, and explore more options to provide
Governments need to: long-term financing. MDBs should provide
concessional financing for all developing
> Meet ODA commitments and provide fresh countries, including middle-income countries.
concessional financing for developing coun-
tries, especially LDCs and SIDS; Non-concessional lending windows of
MDBs also provide an important avenue for
> Recapitalize multilateral, regional and
middle-income countries to access long-term
national development banks and accelerate
affordable finance, critical to building back
the timetable for agreeing on a fresh replen-
better and stimulating growth and develop-
ishment of funds; and
ment. Regional and national development
> Provide long-term8 financing to developing
banks should also be recapitalized so that
countries for investment in inclusive growth
and sustainable development.
8 United Nations (2020). Financing for Sustainable Development Report. New York: United Nations, p. 110. https://developmentfinance.
un.org/sites/developmentfinance.un.org/files/AUV_2021%20FSDR.pdf.
6 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021they can extend concessional finance to all structure, could prioritize financing for recov-
countries in need. Development banks could ery and green-linked investments, ensuring
also adopt more flexible criteria for lending. additional financing is used for the SDGs.
To complement additional financing from public Another proposal is to set up a Fund to
development banks, proposals have been made Alleviate COVID-19 Economics (FACE), with
for new facilities and funds. One proposal has the objective of mitigating the economic
been to set up a Liquidity and Sustainability impact of the pandemic on individuals and
Facility (LSF) to address liquidity and financ- the productive sectors of developing coun-
ing needs of middle-income countries with tries.10 The fund, which would be channelled
strong macroeconomic fundamentals.9 This through the MDBs, would have a capital of
promising facility, which should be equipped US$500 billion and provide loans with 50 years
with an adequate design and governance maturity and a zero or very low interest rate.
9 United Nations (2020). Financing for Development in the Era of COVID-19 and Beyond: Menu of Options for the Consideration of Heads of
State and Government, Part II, p. 72. www.un.org/sites/un2.un.org/files/financing_for_development_covid19_part_ii_hosg.pdf; see also,
UNECA (2021). Liquidity and Sustainability Facility. PowerPoint presentation, 22 March, 10pp.
10 United Nations (2020), op. cit.
7 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021Liquidity support
As noted above, central banks across the world same terms. By early March 2021, 46 out of 73
introduced monetary easing measures on an eligible countries had benefited from around
unprecedented scale, which helped prevent a US$5 billion in debt service suspension, with
new global financial crisis. However, massive savings contributing to the pandemic response.
injections of liquidity are not without risk as
ultra-low interest rates can fuel high asset prices However, the financial impact of the DSSI
and speculation. In addition, many developing has been blunted by the lack of participation
countries have not been able to access capital of private creditors, to whom DSSI eligible
markets because of low credit ratings and corre- countries collectively owe about one third of
sponding high borrowing costs. At the onset of their total debt service obligations in 2021.
the pandemic these countries faced an impos- Debtors participating in the DSSI were reluctant
sible choice between: (i) continuing to service to request private creditors to join the initiative
their external debts; (ii) addressing urgent needs out of fear that this could lead to downgrades
related to combating the pandemic and support- in their sovereign credit ratings and higher
ing jobs and income, including through basic borrowing costs. In addition, some hybrid
social protection; and (iii) investing in the SDGs (semi-public) G20 lenders have opted out of the
and a more sustainable and resilient future. DSSI. As a result, the DSSI has important gaps.
To support developing countries in need, the Another gap is that the DSSI eligibility criteria
IMF temporarily doubled access to its Rapid excludes nine of the 34 countries with a substan-
Credit Facility (RCF) and Rapid Financing tial risk of debt default, which includes some
Instrument (RFI), providing over US$100 billion highly vulnerable small island developing States
to member countries, in addition to the more (SIDS). In addition, middle-income countries
than US$200 billion delivered by MDBs. not eligible to the DSSI have US$31 billion in
bilateral debt service due in 2021 compared
In addition, in April 2020, the G20 Finance to US$16.6 billion for eligible countries11 and
Ministers endorsed the Debt Service Suspension while some of them have adequate market
Initiative (DSSI) to bolster crisis mitigation in access to refinance their debts, many do not.
IDA-eligible countries. The DSSI temporarily Without international support these countries
suspends debt service payments to bilateral will need to cut fiscal expenditures to be able
official creditors for countries eligible to borrow to service their external debts, curtailing
from the IDA, plus Angola, upon request. The their response and recovery prospects.
G20 invited private creditors to suspend the
debt services of participants in the DSSI on the
11 Kharas and Dooley (2021), op. cit.
8 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021Recommendations to provide liquidity to devel- As of 19 March 2021, the G7 endorsed a
oping countries fall into two main categories: “new and sizeable” allocation of SDRs,13 with
an SDR allocation (and voluntary reallocation) most experts recommending between 350
and an extension of the DSSI to temporarily billion and 455 billion SDRs (equivalent to
bridge foreign exchange and fiscal shortfalls. 12
US$500 billion to US$650 billion).14 SDRs
are distributed across the IMF members in
proportion to their quota shares, with devel-
oped countries receiving 60.4 percent and
A NEW GENERAL developing countries 39.6 percent,15 including
ALLOCATION OF SDRs 3.5 per cent to least developed countries.
> Provision of a new allocation of SDRs (as Thus, to ensure that the new SDRs go to
discussed by the IMF Board), and voluntary countries that need them most, IMF member
reallocation of SDRs from countries with countries with strong external positions could
sufficient international reserves to countries voluntarily reallocate their existing SDRs, either
facing persistent external deficits or emer- bilaterally or through existing mechanisms such
gency situations, including vulnerable and as the IMF’s Poverty Reduction and Growth Trust
conflict-affected countries. (PRGT). However, only low-income countries
are eligible to borrow from the PRGT. The
> IMF member countries are also urged to con-
establishment of a new trust fund to be housed
sider (i) replenishing the Poverty Reduction
at the IMF should therefore be considered to
Growth Trust (PRGT) of the IMF and (ii)
support middle-income countries, and SIDS in
establishing a new trust fund hosted by the
particular, in their response and recovery efforts.
IMF to support middle-income countries in
their response and recovery efforts.
In addition to the proposals above, other
suggestions could be considered through
The IMF occasionally issues SDRs to supple-
multilateral or bilateral arrangements on a
ment IMF member countries’ foreign exchange
voluntary basis to utilize SDRs, including for
reserves. A new allocation of SDRs in a crisis
making vaccines available and helping coun-
context is not without precedent: in 2009,
tries in their response and recovery plans.16
during the global financial crisis, the IMF issued
182.6 billion SDRs, bringing the total cumula-
Overall, a new SDR allocation combined with a
tive allocations to about 204.2 billion SDRs,
range of options to reallocate excess SDRs to
equivalent to around US$294 billion in 2020.
countries that need them most will send a power-
ful signal of a cooperative multilateral response.
12 United Nations (2020). Financing for Development in the Era of COVID-19 and Beyond: Menu of Options for the Consideration of Heads of
State and Government, Part II, pp. 72–74. www.un.org/sites/un2.un.org/files/financing_for_development_covid19_part_ii_hosg.pdf.
13 G7 (2021). Chancellor and G7 Finance Ministers agree milestone support for vulnerable countries. Press release, 19 March. www.g7uk.
org/chancellor-and-g7-finance-ministers-agree-milestone-support-for-vulnerable-countries.
14 See for instance Ocampo, J.A. (2021). http://project-syndicate.org/commentary/new-sdr-allocation-calls-for-two-reforms-by-jose-anto-
nio-ocampo-2021-03, 5 March; and Gallagher, Ocampo (2020) “It’s time for a major issuance of the IMF’s Special Drawing Rights”, availa-
ble at ftalphaville.ft.com/2020/03/20/1584709367000/It-s-time-for-a-major-issuance-of-the-IMF-s-Special-Drawing-Rights.
15 According to United Nations classifications.
16 Kharas H. and Dooley, M. (2021). Debt Distress and Development Distress: Twin crises of 2021. Working Paper 153. Washington, D.C.:
Brookings, 35 pp.
9 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021Extension of the debt service
suspension
The G20 is strongly encouraged to: A proposal to encourage private creditor
participation in standstills is the establishment
> Extend the DSSI at least until the end of June of a Central Credit Facility (CCF)17 at financial
2022; institutions with preferred creditor status, such
> Include middle-income countries in the DSSI, as the World Bank and/or regional development
in particular SIDS, conflict-affected and banks. Countries seeking forbearance could
other vulnerable countries that have been redirect their interest and principal payments to
seriously affected by the crisis; bilateral and the CCF and receive them back as low-interest
multilateral creditors should consider offer- loans for specific pandemic mitigation spending.
ing DSSI terms to these countries on a case- While not a replacement for creditor coordina-
by-case basis; tion, such a facility would allow debtor countries
> Ensure that debt relief is additional to exist- to initiate a debt suspension process without
ing concessional aid; and waiting for lenders to coordinate. In exchange
for releasing the debtor from its obligations to
> Bilateral G20 creditors, including hybrid
the private creditor, the relevant amount would
lenders, should consider mechanisms to
be credited to the creditors’ account in the CCF.
include private sector participation in the
DSSI and in future debt standstills.
State-contingent elements in bond contracts
can provide another mechanism to increase
private participation in future debt standstills.
17 Bolton. P. et al. (2020). Born out of necessity: A debt standstill for Covid-19. CEPR Policy Insight Nr. 103, April.
10 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021Debt relief and the Common
Framework
In my brief dated April 2020, I urged the inter- debt relief through the Common Framework
national community to consider targeted debt could further disincentivize countries from
relief beyond a moratorium. I commend the approaching their private creditors. Despite
G20 for establishing the Common Framework these limitations, the Common Framework can
on Debt Treatments Beyond the DSSI in be an effective platform for creditor coordi-
November 2020, a welcome extension of the nation, which could serve as a starting point
initial focus on providing liquidity support towards creating a more universal and perma-
towards addressing solvency concerns. nent framework for sovereign debt resolution.
Early in the pandemic, the IMF had already The international community is urged to:
provided debt service relief to its poorest and
most vulnerable members through grants from
> Build on the Common Framework to offer
legal and technical advice on options for
the Catastrophe Containment and Relief Trust
debt and debt service relief to help coun-
(CCRT). The G20’s Common Framework for
tries in need – including debt swaps, debt
Debt Treatments Beyond the DSSI (the Common
buy-backs, credit enhancements, reprofiling
Framework) extends the provision of debt relief
or exchanging debt, and/or cancellation –
to all the DSSI-eligible countries. Its goal is to
depending on a country’s specific circum-
facilitate on a case-by-case basis a timely and
stances and debt challenges;
orderly debt restructuring of bilateral official
debts with members of the G20, including hybrid > Extend the eligibility to debt relief under the
lenders. Other, non-G20 official creditors, as well Common Framework to other vulnerable
as private creditors are invited to participate countries on a case-by-case basis; and
and provide debt relief on the same terms. > Consider other mechanisms that would allow
Three countries have so far requested debt countries to access the Common Framework
restructuring through the Common Framework. without creating a stigma or compromising
the credit rating of the beneficiaries, includ-
The Common Framework, however, faces ing funds and other instruments within exist-
similar limitations to the DSSI. First, vulnerable ing institutions.
middle-income countries remain ineligible.
Second, in the absence of additional measures The international community should consider
to incentivize or compel private creditor partic- an initiative to build on and complement the
ipation, comparable treatment of commercial Common Framework, both by reaching a wider
creditors will remain challenging in practice. group of countries and by offering capacity
The recent downgrade of the sovereign credit building and legal advisory services to debtor
ratings of one of the countries that applied for countries around a range of debt reduction
11 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021strategies. Its focus would be on (i) maintaining of tailor-made relief initiatives depending on
sound debt management, as well as (ii) freeing the debtor country’s situation. As it would offer
up resources for investment in the COVID-19 a wide range of legal and technical advice,
response, including securing vaccines, and the requests from countries for support through this
SDGs, including climate action. In this context, initiative should not per se trigger a downgrade
integrated national financing frameworks (INFFs) by the rating agencies, unlike what has been
can play a role in helping debtor countries observed with the Common Framework. The
determine their long-term financial needs. initiative could also help support debtors in debt
restructuring negotiations with their creditors.
In providing debt relief, this complementary In addition, as indicated by the IMF proposals
initiative to the Common Framework would in the 2020 Annual meetings, international
consider a range of instruments and initiatives, financial institutions could offer complementary
including debt swaps, buy-backs, exchanges, credits to countries involved in debt restruc-
and credit enhancements, and offer a spectrum turings to facilitate reaching an agreement.18
18 Ocampo, J.A. (2021), “Future Development Managing developing countries’ sovereign debt”, available at www.brookings.edu/blog/
future-development/2021/03/08/managing-developing-countries-sovereign-debt.
12 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021The international debt architecture
While the dramatic impact of the current when needed, and (ii) to address the underlying
crisis requires an immediate response, the causes of unsustainable increases in sovereign
crisis has also highlighted the need to address debts and prevent their recurrence. An effec-
underlying challenges, both at national levels tive debt architecture should give countries
and in the global architecture. The current greater room for investing in sustainable
debt architecture has been ineffective in both development and play an important role in
preventing repeated episodes of unsustainable increasing the resilience and stability of the
debt buildups and in restructuring debts, international financial system in the face of
when needed, in an efficient, fair, and durable future pandemics or climate-related disasters.
manner. It is characterized by numerous gaps
in transparency and a lack of clarity about roles
and responsibilities. More importantly, there
STRENGTHENED ARCHITECTURE
are no processes that incentivize all creditors
and debtors to act cooperatively in accordance
THROUGH PRINCIPLES
to a uniform set of principles and standards.
> As a basis for the international debt archi-
Architecture reform will require new tools, tecture, a wide range of stakeholders
instruments, and legislative backing, but also should agree on a set of principles and
a shift in mindset towards a set of principles considerations.
including responsible borrowing and lending
with fair, transparent, efficient and equitable Possible considerations include the following:
workouts. The new architecture must also be > Debt transparency and management.
aligned with the SDGs and the goals of the Transparency should be promoted in order
Paris Agreement, and acknowledge the need to to enhance the accountability of the actors
transition to a sustainable, inclusive and resilient concerned, which can be achieved through
economy in all of its aspects. Any reforms must the timely sharing of both data and processes
be based on a process with accepted legitimacy related to sovereign debt workouts.
by a wide range of stakeholders that includes
Paris and non-Paris Club official creditors, Gaps in debt transparency have grown larger
private creditors, and sovereign debtors. It is over time with more diverse creditors. The
in the interest of all parties that international World Bank reports that half of all IDA coun-
institutions facilitate this process by providing tries do not have adequate capacity in their
a space for open dialogue and to build trust debt management policy and institutions,
and transparency in a systematic way. including data collection and reporting.
The reform of the international debt architecture Building consensus for new norms and
should have two objectives: (i) to facilitate standards for transparency in debt reporting
expedient, fair and orderly debt workouts, and data is the foundation for a more resilient
13 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021international architecture. One solution is to but such global consensus remains elusive to
provide additional technical assistance to date.
improve such capacity. Another is to shift > Shared responsibility and fair burden sharing
incentives for all debtors and creditors, public among creditors and between debtors and
and private, to provide more accurate and creditors. The Addis Ababa Action Agenda
complete information. Close collaboration recognizes that there is scope to improve
among international organizations, particu- coordination between debtors and creditors to
larly the United Nations, the IMF and the minimize both creditor and debtor moral haz-
World Bank, will be essential in this regard. ards, and to facilitate fair burden-sharing and
the need for debtors and creditors to share
> Sustainability. Workouts from a sovereign
responsibility to prevent and resolve unsus-
debt crisis should aim to restore sound public
tainable debt situations. The Basic Principles
debt management, while preserving access to
on Sovereign Debt Restructurings of the United
financing resources under favourable condi-
Nations provide additional guidance for debt-
tions, including concessional financing which
ors and creditors in restructuring processes.20
is important in accelerating the achievement
of the SDGs and Paris Agreement. Consistent
with the Doha Declaration on Financing for
Development and the Addis Ababa Action BUILDING ON EXISTING
Plan, workouts should not compromise the INITIATIVES
ability of debtor countries to achieve sustain-
able development and the SDGs. > Include mechanisms that consider the risk of
> The Addis Ababa Action Agenda recognizes credit rating downgrades, including through
that while maintaining sustainable debt levels an open conversation with investors, market
is the responsibility of the borrowing coun- participants and credit rating agencies.
tries, lenders also have a responsibility to > Develop long-term credit ratings (10 years or
lend in a way that does not undermine a coun- more) to complement existing assessments.
try’s sound debt management. Multiple initia-
tives by the International Financial Institutions Long-term productive investments in the SDGs
are underway to promote responsible borrow- can enhance long-term debt management, but
ing and lending practices, as well as ‘soft-law’ they are not accounted for in credit ratings. Yet
approaches such as the G20 Operational if investments improve debt management in the
Guidelines for Sustainable Financing or the long term, they should be financeable in the near
UNCTAD principles on promoting responsible term. Credit rating agencies should consider
sovereign lending and borrowing. 19
issuing long-term ratings alongside traditional
> In the Addis Ababa Action Agenda, United ratings, building on similar assessments already
Nations Member States had committed to conducted by the IMF and the World Bank.
work towards a global consensus on guide- Indeed, a favourable long-term rating could both
lines for debtor and creditor responsibilities, create incentives for countries to invest more
effectively in sustainable development and help
them raise long-term capital for that purpose.
19 UNCTAD, “Principles on promoting responsible sovereign lending and borrowing,” 10 January 2012. Available at https://unctad.org/
system/files/official-document/gdsddf2012misc1_en.pdf.
20 General Assembly Resolution on Basic Principles on Sovereign Debt Restructuring Processes (A/69/L.84), July 2015.
14 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021> Include state-contingent clauses in public After the IMF’s endorsement in 2014, Collective
debt contracts to ’automatize’ standstills in Action Clauses (CACs) have been included in
times of crisis, and to set a precedent for almost all new sovereign bonds to date. CACs
private markets. allow a qualified majority of bondholders to
make a restructuring agreement with a debtor
State-contingent debt instruments (SCDIs) link
binding to all bondholders, preventing an
debt servicing to a predefined variable such as
uncooperative minority of bondholders from
GDP, national income, exports, or commodity
blocking it. CACs can work in conjunction with
prices. Similarly, some loans contain clauses
anti-vulture fund legislation. Such legislation,
for extreme events such as hurricanes and
currently enacted in a few countries, limits the
other natural disasters. They can be designed
ability of holdout creditors to receive, through
to provide additional creditor compensation
litigation payment at face value, debt bought
in good times or relief in bad times such as
in secondary markets at deeply discounted
disasters. They thus build debt standstills
values. However, while CACs represent a
into contracts and eliminate the need for
promising future mechanism for greater debt
renegotiation in times of stress. In the context
cooperation, they are not retroactive – many
of debt restructurings, they may help avoid
developing countries have outstanding debt
protracted disputes about the economic outlook
stock without CACs. The architecture could
by tying debt service to future outcomes.
be strengthened over time if all major finan-
The use of such instruments in the past has been cial centres made it mandatory to include
rather limited. To realize their potential, the offi- CACs in all maturities exceeding one year.
cial sector, including G20 members, should con-
Creditor committees have been used to varying
sider incorporating standardized SCDIs in official
degrees in sovereign debt restructurings. They
lending and debt restructurings and enhance
can help bring official and private creditors
data provision to facilitate the use of common
together and allow the debtor to negotiate
state variables not subject to manipulation risk.
with a single body. Once a consensus is
They would also need to explicitly recognize the
reached, committees can limit holdouts by
resilience afforded by SCDIs in assessments
endorsing the deal, and applying pressure on
of the sustainability of debt management.
others to sign. They can be useful in a world
> Complement existing instruments for more of non-transparent debt data as all creditors
effective debt crisis resolution, including receive access to the same financial informa-
collective action clauses, anti-vulture legis- tion and can see what others’ claims are.
lation and creditor committees.
> Use the G20 Common Framework as a step
Reforming the international debt architecture toward a more universal and permanent
is necessary, especially to address a potential framework for sovereign debt resolution.
increase in sovereign debt restructurings in the > Launch a global forum for sovereign debt
aftermath of the pandemic, including the risk resolution and coordination to build consen-
of a systemic crisis. Reforms should be aimed sus for new norms and standards for debt
at providing speedy and sufficiently deep debt transparency and management, considering
relief to countries that need it, benefitting not options of mediation and arbitration in debt
only these countries but the system as a whole. restructuring.
15 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021Proposals include the establishment of a sover- > The international community should build
eign debt forum, which could provide a platform on (i) existing principles put forward in the
for discussions between creditors and debtors, Addis Ababa Action Agenda and in other
in the context of SDG debt relief, and facilitate forums and (ii) existing instruments and
agreements on voluntary stays, coordinated mechanisms.
rollovers and other measures. An alternative > Dialogue among stakeholders can elaborate
is an international sovereign debt authority further these principles, instruments and
or mechanism, an expert-based authority or mechanisms in the follow-up process to the
standing body independent of creditor and Meeting of Heads of State and Government
debtor interests that could coordinate and fur- on the International Debt Architecture and
ther develop many of the proposals mentioned Liquidity.
above. The establishment of a public multilateral
credit rating agency that would not be subject Discussions at the United Nations in follow-up
to conflicts of interest between private and to the High-level Event on Financing for
public interests has also been proposed. Development in the Era of COVID-19 and Beyond
have underscored the importance of progress
on structural solutions as a necessary condition
for achieving the SDGs. The COVID-19 crisis has
once again shone light on these issues. Now is
the time to take action by bringing together all
stakeholders for an evidence-based discussion
on feasible options for long-lasting solutions.
16 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021Conclusions and call for action
Recommendations to create space for > Provide long-term financing to developing
investment in crisis response and the countries for investment in inclusive growth
SDGs, including strong climate action and sustainable development.
are divided into six areas, addressing (i)
liquidity constraints, (ii) provision of fresh
financing, (iii) a new general allocation of
SDRs, (iv) debt service suspension, (v) debt A NEW GENERAL
relief and the Common Framework, and ALLOCATION OF SDRs
(vi) the international debt architecture.
> Provision of a new allocation of SDRs (as
discussed by the IMF Board), and voluntary
reallocation of SDRs from countries with
LIQUIDITY CONSTRAINTS sufficient international reserves to countries
facing persistent external deficits or emer-
There are two main recommendations to gency situations, including vulnerable and
support liquidity for developing countries: conflict-affected countries.
> An SDR allocation (and voluntary reallocation)
> IMF member countries are also urged to con-
sider (i) replenishing the Poverty Reduction
to provide balance of payment support to
Growth Trust (PRGT) of the IMF and (ii) estab-
countries in need; and
lishing a new trust fund hosted by the IMF
> An extension of the DSSI to temporarily
to support middle-income countries in their
bridge foreign exchange and fiscal shortfalls.
response and recovery efforts.
PROVISION OF FRESH DEBT SERVICE SUSPENSION
FINANCING
The G20 would need to:
Governments need to:
> Extend the DSSI at least until the end of June
> Meet ODA commitments and provide fresh 2022;
concessional financing for developing coun- > Include middle-income countries, in particular
tries, especially LDCs and SIDS; SIDS, conflict-affected and other vulnerable
> Recapitalize multilateral, regional and countries that have been seriously affected
national development banks and accelerate by the crisis; bilateral and multilateral credi-
the timetable for agreeing on a fresh replen- tors should consider offering DSSI terms to
ishment of funds; and these countries on a case-by-case basis;
17 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021> Ensure that debt relief is additional to existing
concessional aid; and INTERNATIONAL DEBT
> Bilateral G20 creditors, including hybrid lend- ARCHITECTURE
ers, should consider mechanisms to include
private sector participation in the DSSI and in > As a basis for the international debt archi-
future debt standstills. tecture, a wide range of stakeholders
should agree on a set of principles and
considerations.
> Include mechanisms that consider the risk of
DEBT RELIEF AND THE credit rating downgrades, including through
COMMON FRAMEWORK an open conversation with investors, market
participants and credit rating agencies.
> The international community should build > Develop long-term credit ratings (10 years or
on the Common Framework to offer legal more) to complement existing assessments.
and technical advice on options for debt and
> Include state-contingent clauses in public
debt service relief to help countries in need –
debt contracts to ’automatize’ standstills in
including debt swaps, debt buy-backs, credit
times of crisis, and to set a precedent for pri-
enhancements, reprofiling or exchanging
vate markets.
debt, and/or cancellation – depending on a
country’s specific circumstances and debt > Complement existing instruments for more
challenges. effective debt crisis resolution, including col-
lective action clauses, anti-vulture legislation
> Extend the eligibility to debt relief under the
and creditor committees.
Common Framework to other vulnerable
countries on a case-by-case basis. > Use the G20 Common Framework as a step
toward a more universal and permanent
> Consider other mechanisms that would allow
framework for sovereign debt resolution.
countries to access the Common Framework
without creating a stigma or compromising > Launch a global forum for sovereign debt
the credit rating of the beneficiaries, including resolution and coordination to build consen-
funds and other instruments within existing sus for new norms and standards for debt
institutions. transparency and management, considering
options on mediation and arbitration in debt
restructuring.
> It would provide options for strengthening the
international debt architecture, building on (i)
existing principles put forward in the Addis
Ababa Action Agenda and in other forums
and (ii) existing instruments and mecha-
nisms. Dialogue among stakeholders can
further elaborate these principles during the
follow-up process to the Meeting of Heads
of State and Government on the International
Debt Architecture and Liquidity.
18 LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021You can also read
